May 10 2022
"Once you know why your interest rate is higher for your investment property, you can begin to understand how you can save." - Marco Zande, Strategy Executive
Australians are obsessed with property and it’s one of the most popular investment options. It’s easy to see why - property prices have soared over the last few years which has made a lot of investors very rich.
But scoring a low-interest rate on an investment loan is generally a little harder than for an owner-occupied property. Investment home loan rates are typically higher than interest rates on owner-occupier loans - usually by as much as 40 basis points. So what’s the deal?
Why are investor rates higher than owner-occupier rates?
Investment home loan rates are generally higher than owner-occupied home loan rates because lenders view investors as risker borrowers compared with those who are buying a home to live in. This is because investors are perceived to have a higher risk of unstable income because the rental income on the investment property isn’t guaranteed which can make lenders a little skittish. If the property is vacant for some time because you’re unable to find tenants, or the property doesn’t increase in value, you may not have the financial means to repay your loan which presents a big risk to the lender.
Investment loans can also present a flight risk because investors have a lesser personal stake as they’re not occupying the property. Though unlikely, there’s a chance that an investor could jump ship and abandon the home (and the loan) if their financial situation goes belly up.
There’s also the fact that property investors tend to have multiple investment properties, which means they borrow at higher levels of leverage and may have accrued multiple debts.
How investors can reduce costs
There are a few things investors can do to get a better deal on their investment loan and reduce costs, which include:
Saving a bigger deposit
Generally, investors need at least a 20% deposit when purchasing an investment property. But going in with an even bigger deposit decreases your application's loan-to-value ratio (LVR), which can reduce your risk in the eyes of the lender and potentially make you eligible for a more competitive interest rate.
Have a good credit score
You’ll also have a better chance of qualifying for a more competitive interest rate if you maintain a good credit score. Reducing your debts and proving that you can make repayments on time will make your application more attractive to a lender.
Compare interest rates
Lastly, shop around and compare interest rates from different lenders before taking out an investment loan. Home loan interest rates have already started rising, particularly on fixed rates, and with the Reserve Bank expected to begin hiking the official cash rate by as early as June, rates are tipped to continue rising in 2022 and beyond.
Source: Your Investment Property
Mortimer, M. (2022, April 26). Why do investors pay more for home loans? Property Investment Magazine find Australia's best investment suburbs. https://www.yourinvestmentpropertymag.com.au/buying-property/why-do-investors-pay-more-for-home-loans-279040.aspx